Last week, the Federal Reserve made the drastic decision to lower the federal funds rate by .5% in response to economic uncertainty caused by the US coronavirus outbreak.
The federal funds controls banks' interest rates and ultimately determines consumer interest rates on products like mortgages and other loans.
Soon after interest rates fell, homeowners rushed to refinance their mortgages, causing a 79% spike in applications according to the Mortgage Bankers Association. But, homeowners are not the only borrowers that could benefit from lower interest rates - student loan borrowers could also save.
"There is a direct relationship between market interest rates and the interest rates that consumers have access to," says David Klein, cofounder of online lender CommonBond. "That's what we've seen since market rates have decreased quite precipitously over the last few weeks. Now, people have an opportunity to refinance their student debt at rates that folks haven't seen before."
Note that refinancing is not right for everyone - borrowers who have had a big drop in their credit score, a recent bankruptcy, or who don't have a steady income may not see the benefit. As with anything you're considering for your money, make sure to shop around and get multiple quotes for a refinance.
If you're in one - or more - of the following situations, you might want to explore your options to refinance:
For borrowers struggling to keep track of multiple loans, refinancing can help. "The average student loan borrower in this country has over five loans by the time they graduate, many times with different lenders. That's just really difficult to manage," Klein says. Refinancing brings all of those loans into a single loan, with one monthly payment.
Note that if you do refinance, any federal loans will become private loans and you'll lose the ability to take advantage of federal loan repayment options, like income-driven repayment plans that cap your payments at a certain percentage of your income.
Student loan interest rates are also widely influenced by credit score, and that can increase a lot after college. "When people get student loans to go to college, they tend to come in at a higher interest rate than what is available to them once they graduate," Klein says.
With interest rates falling, there's a good chance that you could replace the higher interest rates you were offered years ago on your student loans. Interest rates for federal student loans taken out between July 2006 and July 2013, for example, carry an interest rate of 6.8% for unsubsidized undergraduate loans, while subsidized loans ranged from 3.4% to 6.8% APR, according to data from the US Department of Education.
By contrast, student loan refinance rates hit a 12-month low in September 2019, according to data from Credible. Since then, interest rate drops have taken student loan refinancing rates even lower. According to data from Bankrate, interest rates on fixed-rate student loans in March 2020 start between 2.89% and 3.54%.
It's worth noting that interest rates are constantly changing, and they could continue to fall further. But, given the low interest rates now, it's a great time to take advantage of lower interest rates and save.
"The silver lining of the Coronavirus and the uncertainty it is wreaking on the market is that for people who hold debt, there has rarely been a better time to refinance," Klein says.